November 14, 2017

Even a Pro Can Fall Victim to the Headlines

Last year at this time, I was in a hotel room in New York City on election night. I was three hours ahead of everyone back home, the polls were just starting to close on the East Coast and the results were starting to trickle in. At the same time, the overnight stock futures market was starting to tank in anticipation of an unpredicted Trump win.

As the polls closed, the stock futures market proceeded to get worse as a Trump win became more and more of a reality. At about 11:00 pm EST and around the time polls were closing back here in California, I started  to draft an email to all my clients telling them not to worry and explaining how we have lived through other downturns like the one the futures market was now predicting.

I was trying to anticipate the possible client questions and get ahead of them in my mind when two things struck me:

  1. The markets wouldn’t be opening for another ten hours and a lot can happen in ten hours.
  2. I realized I had fallen into the trap of believing that the market can be predicted.

At that point, I decided to go to bed and see what the morning held before I sent that email. And a good thing too, because as we now know, the S&P 500 has increased by more than 20% since last year’s election. Once again, the market reminded me that even a pro can fall victim to the headlines, and that staying the course is always the most sound strategy.

How the Stock Futures Market Works

The Stock Futures Market uses the S&P 500 index. The value of the S&P 500 index is a weighted average of 500 stocks. An S&P 500 index future is a contract that predicts what the value of the index will be at the contract expiration date. S&P 500 futures expire quarterly – in March, June, September and December. The next expiration date is called the “front month.” At any given time, the “futures price” quoted on the S&P 500 index futures contract refers to the anticipated price of the index on the expiration date of the front month. The value of an S&P 500 index futures contract, as traded on the Chicago Mercantile Exchange, is $250 multiplied by the futures price. If the futures price of the S&P 500 stands at $1,470, the contract would be valued at $367,500. At the close of trading on expiration day, the final – or “settlement” – price of the contract is exactly equal to that day’s closing price of the index.